Successful Price Negotiation with Professional Supply Managers

the purchasing world is changing and sellers are being left behind
THE PROBLEM
You have flawlessly executed your sales
process at multiple levels within your
customers organization and now you sit
across the desk from the supply manager
who states your competition is 25%
cheaper, you have to go back and sharpen
your pencil!

occurring in the procurement world today.

The buyer profile is changing, evidenced
by one University, Arizona State, who is
pumping out 23 year old MBAs with an
emphasis in Strategic Supply Chain
Management. These well-equipped supply
managers are concerned with the optimal
total solution for their firm. They are performing in-depth analysis on the value
of our solution vs. our competitor. These
new buyers are frustrated as they justifiably
point out that sellers promote value but
cant quantify it.

Our prediction: Buyers are ahead of sellers in quantifying value and soon will be
presenting us with total cost of ownership
projections on our solution that surpasses
any analysis we have.

You have a choice; go back to HQ and ask

for a lower price, or take an analytical
approach to dissecting this problem.

THE ANALYSIS
Lets start by getting a sense of what really
drives todays purchasing professionals.
The notion that a buyer is only interested
in price is not entirely logical. Almost any
business to business sale where a professional supply manager and an account
executive are involved is a complex one.
If the deal is to be successful, there will be
multiple criteria to be met on both sides.
Take for example the following supplier
performance metrics:

Financial stability
People
Supplier performance
Supplier cost reduction ideas
Supplier development projects
Delivery
Quality
Product Cost
Order accuracy
Customer support
Business relations
Source: 9/01 Supplier Selection & Management Report

Success with professional buyers will stem

from the ability to get a sense of what is

The purchasing world is rapidly moving

toward developing more effective and
efficient models of supplier value.
Fundamentally, the nature of negotiation
is changing. Those items that truly are
commodities are being reverse auctioned
on the web with the lowest priced bidder
winning. For non commodity negotiation,
the change is the evolution of a new
purchasing model and most sellers do
not take the time to stay abreast of the progression as noted in the following article:
The idea was to get a better deal than
your sales counterpart, and authority, power
struggles, and emotional haggling were the
tools. Enter the 21st century and a new look
for negotiations. According to The Future of
Purchasing and Supply: A Five- and Ten-Year
Forecast, the negotiation process will become
more complex and sophisticated because it
will move toward more win-win relationships,
relying on total cost as a criterion.
1998 study, by NAPM, the Center for Advanced Purchasing
Studies (CAPS), A.T. Kearney, Arizona State University,
and Michigan State University

In our work with major buying organizations we find that very few purchasing
decisions are made based on price alone.
Facts:
Buyers are not charged with buying
the cheapest product available
The lowest price competitor does
not have 100% market share,
Price premiums do exist
Virtually every purchasing organization we
have experience with evaluates suppliers
with a matrix and price is simply one of
the many criteria. In most instances, the
lowest priced supplier does not get the
business. Buyers are charged with supply-

ing their organizations with the lowest total

cost of ownership solution.
What is the fate of the traditional purchaser
who has been trained and is skilled at mere
price haggling? They, like many other
professionals who do not make the shift to
strategic supply management, will find a
world where their services might not be
needed. However, those who do make the shift
will find that relationship-based negotiation
skills will be put to use extensively
The Future of Purchasing and Supply: The New Look of
Negotiations by Roberta J. Duffy, editor of Purchasing
Today. Additional information provided by Joseph L.
Cavinato, Ph.D., senior vice president and NAPM
distinguished professor of supply chain management for
NAPM, Tempe, Arizona.
August 2000 Purchasing Today, page 43.

Further analysis on why salespeople get

caught in the you need to do better on
price track suggests a misunderstanding
of the purchasing function, in addition to
avoiding the necessary analysis required to
effectively respond to a request for price
reduction. Our organizational memory
triggers a natural response when a buyer
asks for a lower price so we do one of two
things, approach HQ for the OK to go
lower, or sell value. Selling value simply
means we try to justify why our solution is
more expensive than elsewhere. Consider
two steps toward a more rational resolution
of the you need to sharpen your pencil
request. These steps should be executed
before one can sell value.

STEP ONE: Consequence

of No Agreement Analysis
When we attempt to compare our offer
to our competitors on the aspect of price
alone, it is illogical. The most common
problem sellers face is responding to
the dreaded your competition is 12%
cheaper. If we think about our value
proposition vs. the competition, we need
to weigh ALL the variables when comparing the two, not just price. Many are:
Switching costs
Human fit and relationships
Impact of our product and services on
the customer organization
Outputs or production
Financial risk
Political Risk
Long term strategic fit and
ability to move forward together
Global reach
Price
The above list is very similar to the list

from the Supplier Selection Report listed

above. Unless we are selling a pure commodity, we should respond to the price
request by completing a thorough analysis
of all the hard and soft costs and benefits
for the short and long term affecting the
customers alternative to us. It is important
to note several things here;
1. Most buyers have not completed the sort
of analysis we suggest. Most compare
two alternative solutions on a small list
of criteria that doesnt effectively evaluate the total cost of ownership for one
product or service vs another. The problem becomes obvious, you are working
with a supply manager that sees your
offer as a gain or a loss based on the
effective, or ineffective, evaluation they
have completed for their alternative to
you. It is up to the sales professional to
know the supply managers alternative
better than they do themselves.
2. Once we complete such analysis it is
imperative that we use the data very
diplomatically to either help the buyer
gain a more realistic view of their alternative, or in the case where they may
have done the analysis use the data to
call a bluff when we are told our offer
is higher than our competition.
3. This analysis should not be performed
for industries or marketplaces, but rather
for very specific deals. The variables
may change and some items will duplicate from one deal to the next, but the
circumstances regarding the consequences of not reaching agreement are
almost always different and should be
flushed out.

tors price. However, even with the new

specialization and advancement of the
sourcing function we find that many buyers
still lack the necessary analysis, no surprise
since it was us who taught them that
simply asking us to sharpen the pencil
works. Further, we find most buyers are
telling what they believe to be the truth
when they state they can get our solution
better and cheaper elsewhere. Their conclusion is not based on rational analysis
but rather partial information. Conversely,
for those buyers who have done the proper
analysis, we need to be armed at least as
well as them.

STEP TWO: Trading Analysis

Another effective tool for negotiating with
the professional buyer is to expand any
negotiation beyond single issue concessions to multiple issue trades. Price
reductions, project up time, or how
many people will be assigned to a job,
are all examples of single issue negotiations. The difficulty with a single issue
negotiation lies in the fact that it is impossible to create value basically equating
the negotiation to a zero sum proposition.
If you are asked to provide your buyer a
10% price reduction all we have done is
to take 10% out of your income and hand
it to the buyer, or more simply, have
rearranged value. The solution is to avoid
asking for, or reacting to, single issue concessions because this behavior doesnt add
incremental and measurable value to the
relationship. We should begin by simultaneously determining multiple issues of
importance to us, and the supply manager,
then trade those items of low value for
those of higher value, a simple but not
easy task.
In order to think thru multiple issues from
the professional supply managers perspective we need to acknowledge that most
operate on behalf of an internal customer
and/or user groups. These groups help the
supply manager determine the variables
that will be negotiated in a deal. For example, someone sourcing technology for a
production facility will take input from the:

Using the Consequence of No Agreement

analysis its almost impossible to respond
to a request that we match our competi-

Technicians on the floor

VP, Manufacturing
VP, Technology
Other impacted departments,
such as accounting, etc.

They learn from these groups what criteria

they should be using to evaluate suppliers
(CNA analysis), and also what they would
like to get out of this deal (concessions);
two very different but related things. Items
that are negotiable are those that can be

taken in or out of a deal and are measurable, such as:

Price ($)
Length of contract (years)
Volume of purchase (# of widgets)
Which add on or value adds to purchase
(software/consulting services)
Warranty issues
(% of defects, # of years)
Support issues (how many people, how
many hours/day and days of week)
They will work with their internal customer
group to rank these items from most to
least important and decide the acceptable
low and high ranges for each item.
In a negotiation, it is in the best interest
of both parties to create measurable incremental value by trading multiple items
simultaneously, vs. reacting to or asking
for, single issue concessions that either
detract from or simply rearrange value. As
sellers, we would be far more effective if
we avoided reacting to a price request and
began assisting the supply manager
achieve as many of their internal customer
objectives as possible while at the same
time trading for items of importance to us.
We all know too many salespeople that
define negotiation as reacting to a list of
zero sum demands from the buyer.

SUMMARY
It is mathematically possible to have both
sides in a negotiation achieve more than
both expected, move well beyond winwin, and create true business value.
Again, this is a simple but not easy task. It
requires both thorough CNA analysis and
thorough Trade analysis before a face to
face negotiation. The supply management
environment is rapidly changing in an
effort to source the highest value business
relationships. It is time that sellers accelerate their negotiation analytics by incorporating a more strategic approach that can
result in the creation of measurable incremental business value.

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Written by Brian Dietmeyer,
Senior Partner, Think! Inc.
Edited by Carrie W. Welles
VP Enterprise Account Solutions, Think! Inc.
Think! Inc. is an international strategic
negotiation consultancy founded by
Dr. Max Bazerman, co-author of
Negotiating Rationally and a professor
at the Harvard Business School.
www.e-thinkinc.com
Phone: 888-99-Think.
Copyright 2001 by Think! Inc. All Rights Reserved.